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The Progressive Economics Forum

Rationalizing Corporate Canada’s Cash Stash

Statistics Canada figures indicate that private non-financial corporations held $471 billion of cash in the first quarter of 2011 ($322 billion of Canadian currency plus $149 billion worth of foreign currency).  Including short-term paper would bring this total to half a trillion dollars, enough to pay off the national debt (i.e. accumulated deficit).

Cash hoarding is a critical point in the debate about corporate taxes. If incremental after-tax profits are being deposited (rather than reinvested or paid out), lower corporate tax rates likely just produce higher piles of cash.

If corporate Canada already has half a trillion dollars more than it wishes to invest in physical or financial assets, there is no reason to expect that corporate tax cuts will boost investment. On the contrary, if the government collected more of this money and invested it directly, Canada would have more investment in total.

Not surprisingly, advocates of corporate tax cuts are trying to rationalize corporate cash hoarding as a normal and positive activity. The Financial Post’s Terry Corcoran recently wrote: “In tough times, corporate Canada had resources to fall back on.”

He suggests a kind of corporate Keynesianism, in which businesses build up reserves during booms and draw them down during recessions. (Accumulating cash during booms and then investing it when asset prices are depressed would be good for profits as well as economic stability.)

This story directly contradicts the Macdonald-Laurier Institute’s previous rationalization that companies build up cash reserves in tough times: “businesses respond to credit crunches by holding as much cash as they can to meet their financial obligations.” In fact, corporate cash hoarding has been more of a secular trend than a cyclical or countercyclical factor.

As I noted a year ago, businesses did withdraw some $30 billion from their Canadian-dollar reserves during the recession’s first two quarters, but then quickly rebuilt those reserves to record levels. So, a $268-billion cushion going into the financial crisis yielded $30 billion of possible stimulus followed by more anti-stimulative cash hoarding.

During those same two quarters, the value of corporate Canada’s foreign-currency reserves actually increased by $16 billion, mostly because the exchange rate fell but also because companies continued to accumulate foreign currency through the downturn. Combining domestic and foreign currency, corporate Canada only reduced its cash stash from $379 billion (2008Q3) to $365 billion (2009Q1) and has since enlarged it to $471 billion (2011Q1).

As Eric Pineault showed graphically and Statistics Canada shows numerically, corporate Canada’s overall approach for at least two decades has been to stockpile ever more cash through good times and bad (with only very rare and slight exceptions). Advocates of corporate tax cuts have not provided a consistent or convincing explanation of how accelerating this ongoing cash accumulation benefits the Canadian public.

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Comments

Comment from Purple Library Guy
Time: July 2, 2011, 3:44 pm

Huh. And that’s not even including the trend towards spending more of that cash on things that aren’t investment, such as stock buy-backs, ever-higher executive compensation and so forth.

Comment from Murray Reiss
Time: July 2, 2011, 8:29 pm

“… corporate cash hoarding has been more of a secular trend …” — A “secular” trend? As opposed to a religious trend? Any way you could clarify what’s meant here?

Comment from Erin Weir
Time: July 2, 2011, 11:43 pm

“A secular trend is one that is sustained over the long term. The term is most often used to distinguish underlying long-term trends from seasonal variations and the effects of economic cycles.”

Comment from Murray Reiss
Time: July 3, 2011, 8:24 am

Thanks, Erin. As you can probably tell, I’m just barely beginning my self-education in economics.

Comment from Todd
Time: July 3, 2011, 9:19 am

Are they waiting for interest rates to go up? It’s the usual story of the rich lending to the poor, but why bother lending much if you’re not going to get back more than an ounce of flesh extra in return?

Comment from Erin Weir
Time: July 3, 2011, 12:29 pm

This cash hoarding has been underway for at least two decades, so today’s low interest rates cannot be the only or initial cause.

Comment from Purple Library Guy
Time: July 3, 2011, 1:05 pm

Well, presumably what it comes down to is that there is, basically, too much money available to invest with compared to the amount of investment opportunities, particularly in terms of productive capital investment, that offer a high return. Which is hardly surprising. If the investing class (both as individuals and in corporate form) manage to get their hands on too much of the money, that means both that they have more to invest and that they are starving the consuming classes that you profit from selling to when you invest.
Partly this is also I think a result of the high standards our hypergreedy capitalists have for rate of return–there seems to be an insistence on really high returns. Not just the latest crisis, but all the bubbles and crises of the past twenty years, seem to trace basically from the rich desperately trying to find profitable investments for all their gobs of money and not completely succeeding. So you get bubbles as they bid up prices, you get vast overinvestment in various Asian countries followed by crashes when it turns out that the prices got too high and lots of the investment was in questionable ventures, you get similar things with the dot-com, and finally you get the move into pure speculation, investing in essentially imaginary goods. You get increasing amounts of simple old-fashioned cheating, as with Madoff. And you get increasing reliance on government to more or less decree a rate of profit (at the expense of taxpayers) if one can’t be found in the wild.

All in some part because the wealthy are so wealthy that they are running out of profitable things to do with the money. On one hand they’ve caused untold economic damage trying to conjure new profitable things to do, but on the other none of it has been sufficient and so they’re sitting on ever-increasing stacks of cash. A reasonable person might at this point realize they have enough money already . . .

Of course it’s not that there’s nothing useful that could be done with that money. Rather, there’s nothing useful to be done with that money that is highly profitable. It’s a really large scale market failure.

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